Question

how do i find the amounts in the character of 291 ordinary income and 1231, i am doing this question with different numbers and i get stuck in this part of distributing the gain between 291 and 1231. can you please help me?

Shimmer Inc. is a calendar-year-end, accrual-method corporation. This year, it sells the following long-term assets:

Asset	Sales Price	Cost	Accumulated Depreciation
Building	$790,000	$777,000	$56,000
Sparkle Corporation stock	333,000	390,000	n/a

Shimmer does not sell any other assets during the year, and its taxable income before these transactions is $987,000.

What are Shimmer's taxable income and tax liability for the year? (New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.)

Answer 1

The amount of gain/(loss) on each transaction is determined as below:

Asset	Sales Price (A)	Adjusted Basis (B)	Gain (A-B)	Character
Building	$790,000	$721,000 (777,000 - 56,000)	$69,000	$13,800 (20% of Accumulated Depreciation is Section 291 Ordinary Income) $55,200 (69,000 - 13,800 = $55,200 is Section 1231 LTCG)
Sparkle Corporation Stock	$333,000	$390,000	-$57,000	$57,000 is LTCL

The value of $55,200 gain (on building) under Section 1231 will be treated as long term capital gain. This amount can be adjusted against the long term capital loss of $57,000 on Sparkle Corporation Stock. As per the applicable rules, a corporation can utilize its capital loss only to the extent of its capital gain. The balance amount of capital loss (57,000 - 55,200 = $1,800) can be carried back to 3 taxable years or carried forward to 5 taxable years.

Now, we can determine the amount of taxable income and tax liability for the year as below:

Taxable Income before Transactions	987,000
Add Ordinary Income from Sale of Building (Section 291)	13,800
Total Taxable Income	$1,000,800
Tax Liability (1,000,800*21%)	$210,168